Saturday, November 10, 2007
Securities Class Actions as Pragmatic Ex Post Regulation, by ELIZABETH CHAMBLEE BURCH, Samford University - Cumberland School of Law, was recently posted on SSRN. Here is the abstract:
Securities class actions are on the chopping block again. And blue-ribbon commissions are claiming that increasing globalization requires a fresh hard look at the relationship between the markets, the Securities Exchange Commission, and private rights of action. Change is inevitable. But it may be disproportionate and ill conceived, ignoring private securities class actions' comparative institutional capability as a check against agency capture, selective enforcement, and secret settlements. For instance, these commissions recommend banning parallel private and SEC fair funds actions, increasing arbitration's use, restricting private securities class actions to insider trading cases, and allowing only the SEC to pursue Rule 10b-5 violations. But these reforms miss the point: in the ongoing regulatory push and pull, corporations are winning the battle.
It is true that the securities class action is not always a perfect regulator. But it is equally true that its role in consequence-based regulation allows the United States to maintain its central attraction as a relatively deregulated market with relaxed ex ante barriers and low entry costs. Moreover, marginalizing the securities class action's function reflects the ongoing trend toward winnowing public adjudication. Arbitration, mediation, and administrative proceedings have replaced judicial hearings, trials, and open records. Transparency and accountability for public law matters has been lost in the shift.
This public function of traditional litigation is so familiar as to be under-theorized: transparent adjudication through securities class actions holds the government and corporations publicly accountable. But securities class actions do more than this. Their pursuit has spillover effects - positive externalities - including innovation, deterrence, information sharing, accountability, and transparency. These spillovers benefit more than parties to a lawsuit; they benefit the public.
Still, most commentators view class actions with suspicion; they see class suits as nonmeritorious byproducts of self-interest and the attorneys who bring them as rent-seekers. But the full picture and texture of securities class actions also necessitates a pragmatic positive account. This Article provides that account. Naturally, I harbor no illusion that the securities class action always functions optimally. It doesn't. For instance, as litigation becomes the primary enforcement method, the responsibility for setting and implementing securities policies blurs between Congress, the judiciary, and private actors. Even from a policy standpoint, however, there is a need to appreciate the respective institutional capabilities of private and public actors. In short, even in their imperfect state, securities class actions can bestow benefits that are lost in pure government-centric enforcement.
The Article thus begins by explaining America's response to the challenge of institutional design. Using ex post regulation - consequence-based regulation - as opposed to heavy ex ante constraints on entry barriers attracts new businesses, fosters competition, and supports economic growth. Integrating both public and private actors into ex post enforcement avoids collective action dilemmas, agency inaction, and private resolution of public law matters through arbitration. But backdoor regulation through litigation, particularly class litigation, has its share of critics. Consequently, within this larger regulatory framework, I reconsider ingrained criticisms, criticisms perpetuating standard rhetoric about both class actions as a species of aggregate litigation and as a tool in securities enforcement.
After addressing those concerns and finding many less problematic than tradition would have us believe, the Article then assesses what is, for many, a counterfactual assertion: securities class actions can do more good than harm. In fact, they are a public good. By supplementing ex post enforcement, securities class actions produce positive externalities, spillover effects that confer public benefits. These benefits include innovation, cost-reduction through information sharing, deterrence, transparent process, and accountability. Because any attempt to assign numerical values to these benefits is inherently artificial, I opt instead to weigh benefits in terms of social objectives, educational goals, and accountability schemes. Their import is perhaps best gauged through indignation over their absence and the consequences that follow. Therefore, I envision the consequences of eliminating securities class actions by imagining a world with government-centric securities enforcement. That world, I contend, is one steeped in bureaucracy, one failing to produce behavior-guiding precedent, one filled with closed-door arbitrations, one overlooking nonprioritized misconduct, and one ignoring litigant preference for judicial process. That world is one severe enough to outweigh my lingering doctrinal and jurisprudential concerns about securities class actions. In short, it is a world less preferable than our current system - flawed though it may be.